Ed ArditteSr. Vice President, Strategy & Investor Relations
Patrick DeckerPresident, Flow Control
June 4, 2008
JPMorgan 3rd Annual Basics and Industrials Conference
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Forward-Looking Statement/Non-GAAP Measures
This presentation contains certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to risks, uncertainty and changes in circumstances, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. All statements contained herein that are not clearly historical in nature are forward-looking and the words “opportunities,” “anticipate,” “believe,” “expect,” “estimate,” “plan” and similar expressions are generally intended to identify forward-looking statements.
The forward-looking statements in this presentation may include statements addressing the following subjects: future financial condition and operating results, economic, business, competitive and/or regulatory factors affecting Tyco’s business. Any of the following factors may affect Tyco’s future results:
• overall economic and business conditions;• the demand for Tyco’s goods and services;• competitive factors in the industries in which Tyco competes;• changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);• results and consequences of Tyco’s internal investigation and governmental investigations concerning the Company’s governance, management, internal
controls and operations including its business operations outside the United States;• the outcome of litigation and governmental proceedings;• effect of income tax audit settlements;• the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures;• our ability to operate within the limitations imposed by financing arrangements;• interest rate fluctuations and other changes in borrowing costs;• other capital market conditions, including currency exchange rate fluctuations;• availability of and fluctuations in the prices of key raw materials, including steel and copper;• economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders;• the ability to achieve cost savings in connection with the Company’s strategic restructuring and Six Sigma initiatives;• potential further impairment of our goodwill and/or our long-lived assets;• the impact of fluctuations in the price of Tyco common shares;• changes in U.S. and non-U.S. governmental laws and regulations; and • the possible effects on Tyco of future legislation in the United States that may limit or eliminate potential U.S. tax benefits resulting from Tyco’s incorporation in
Bermuda or deny U.S. government contracts to Tyco based upon its incorporation in Bermuda.
These are examples of factors, among others, that could cause actual results to differ materially from those described in the forward-looking statements. In addition, Tyco’s pre-separation financial information is not necessarily representative of the results it would have achieved absent its healthcare and electronics businesses and may not be a reliable indicator of its future results. Tyco is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise. More detailed information about these and other factors is set forth in Tyco’s Annual Report on Form 10-K for the fiscal year ended September 28, 2007 and Quarterly Report on Form 10-Q for the quarter ended March 28, 2008.
Organic revenue growth,, operating income before special items, Adjusted EBITDA, Free Cash Flow, Return On Invested Capital, and Earnings Per Share from Continuing Operations Before Special Items are non-GAAP financial measures and are described in the Appendix.
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A diverse portfolio of market-leading businesses in electronic security, fire, safety services and products, valves and controls, and other industrial products
Strong global business in attractive, growing markets
Large service revenue base
Significant earnings growth opportunities– Operational execution– Portfolio refinement– Appropriate use of capital
Strong cash flow generation and financial flexibility
Tyco International Highlights
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2007 Revenue = $18.5B2007 Revenue = $18.5B
Solid Platforms for Growth
$3.4B
$7.6B
$1.7B
$3.8B
$2.0B
ADT WWFlow Control
Electrical & Metal Products
Safety ProductsFire Protection
Services
We Have a Diverse Portfolio of Market-Leading Businesses
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Other Americas
8%
Europe29% US
48%
Asia Pacific
15%
>50% of our revenue is generated outside of the United StatesEmerging markets represent a large growth opportunityWe operate in more than 60 countries118,000 employees
Emerging Markets Provide Revenue and Earnings Diversification
2007 Revenue = $18.5B
We Have a Strong Presence in Developed Markets with Upside in High-Growth Economies
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A Large, Stable Base of Recurring Revenue
Approximately 36% of Total Revenue Is Comprised of Monitoring and Service Revenue
ADT generates $4.9B of revenue from monitoring andservice activities
Fire generates $1.6B of service and maintenance revenue
2007 Revenue = $18.5B
$11.8B 64%
$6.7B 36%
Product &Installation
Service
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We Are Well-Positioned in Attractive Markets That Are Growing and Fragmented
Tyco 12%
GEHoneywell
Siemens
UTC
Thousands of Others~75%
$30+B MarketExpected Market Growth = 3- 4%
$30+B MarketExpected Market Growth = 3- 4%
00
$38+B MarketExpected Market Growth = 4-5%
$38+B MarketExpected Market Growth = 4-5%
Thousands of others
~85%
Tyco 5%EmersonCameronFlowserve
Global Fire Global Fire IndustryIndustry
$65+B MarketExpected Market Growth = 5-7%
$65+B MarketExpected Market Growth = 5-7%
Siemens
Tyco 11%
UTCThousands of Others
~75%
Secom
Global Electronic Global Electronic Security IndustrySecurity Industry
Global Industrial Valves Global Industrial Valves & Controls Industry& Controls Industry
Source: Freedonia, McIlvaine, Industry and Management Estimates
Industry Growth + Market Share Growth Opportunities
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Significant Opportunities to Improve Earnings Growth
Earnings GrowthEarnings GrowthOperational Operational ExecutionExecution
Organic Growth Focus
Restructuring Programs
Operational Excellence
Corporate Expense Reduction
Tax Rate Reduction
Portfolio Portfolio RefinementRefinement
Divestitures
Selective Acquisitions
Appropriate Appropriate Use of CapitalUse of Capital
Disciplined Investment in our
Businesses
Return Capital to Shareholders
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Operational Execution Plans
ADT WorldwideADT Worldwide
Fire Protection Fire Protection ServicesServices
Safety ProductsSafety Products
Flow Control
Electrical & MetalElectrical & MetalProductsProducts
TycoTyco
Disciplined growth in NAFaster growth in emerging markets
Increasing service revenue
Investment in technology
Restructure / Improve margin in EMEAOperational execution
Operational execution
Gaining share in rapidly growing markets
Operational ExcellenceRestructuring
Productivity through reduced conversion costs
Corporate cost reductionTax Planning
Operational Excellence
Revenue GrowthRevenue Growth Income GrowthIncome Growth
Maintain market leading position in core product lines
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Portfolio Refinement
Divestitures: Significant progress in divesting businesses that do not fit within our portfolio
– Reached agreement to sell Infrastructure Services business for approximately $800 million
– Divested other non-core businesses for proceeds of approximately $230 million
Acquisitions: We will continue to make selective acquisitions in areas that strengthen our existing businesses, primarily technologically and geographically
– Acquired FirstService (a leader in commercial security systems integration) in April that is expected to strengthen our ADT business
– Acquired Trident-Tek (a leading developer of video surveillance solutions) in Q1 08 that strengthened the video and access product group
Driving Cash and Margin Improvement
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We Generate A Substantial Amount of Free Cash Flow
Invest in profitable organic revenue growth initiatives
Fund cost reduction and operational improvement opportunities within our businesses
Make selective acquisitions to enhance our market leadership positions
Return capital to our shareholders
Free Cash Flow is a non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
…Which Provides Significant Financial Flexibility
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Tyco Flow Control Overview
Patrick DeckerPresident
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Global leader in valves, heat tracing, controls and related products
Well-known brands with strong positions
Highly engineered and technical product lines and services
Geographic and end market diversity and balance
Strong macro-economic trends driving robust growth
2007 Revenue of $3.8B
2007 Operating Income before special items* of $486M
Tyco Flow Control At A Glance
* Operating Income before special items is a Non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
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Flow Control - A Strong Global Business
Americas2007 Revenue $936M
Lines of Business:Valves & Automation, Heat Tracing
EMEA2007 Revenue$1,555M
Lines of Business:Valves & Automation, Water, Heat Tracing
Asia2007 Revenue$432M
Lines of Business:Valves & Automation, Heat Tracing
Pacific2007 Revenue$844M
Lines of Business:Water, Valves & Automation
Approximately 80% of Revenue Is From Outside the U.S.
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Flow Control – Balanced Across End Markets
Oil and GasRefiningPower Generation
TrendsNeed for new capacity has been driving strong demand for valves and controlsThermal Controls expected to benefit from large refinery expansion projectsSubsea
End Markets Served
StorageTransmissionDistribution
TrendsAging infrastructure throughout Europe driving need for upgradesIncreasing potable water demand for developing countries
WaterEnergy
Process
Chemical & PharmaMarineFood & BeverageMining & Minerals
Strong Growth Driven by Macro-Economic Trends
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Flow Control—Three Business Platforms
Global leader in heat-tracing solutions
Industrial, global project services
Commercial and residential products for floor warming, snow melting and de-icing
2007 Revenue: ~$550M
Strong regional presence with products and services for water systemsDelivery, transport, storage and treatment of waterInvolved in water needs for government, residential, agriculture and industrial use—from dam to the household
2007 Revenue: ~$1.2B
World’s largest provider of flow control products and servicesProduct range includesvalves, actuators and controlsDelivery and control of liquids, powders and gases for energy and processing industries
2007 Revenue: ~$2.0B
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World Leader in Products & Services That Control the Flow of Fluids or Gases in Wide Range of Environments
Valves & Controls - Flow Control’s Largest Business
Cryogenic conditions (-425° F)
Extreme heat (1500° F)
High pressure and low pressure
Remote, isolated locations
Butterfly Valves
Ball Valves
Gate Valves
Control Valves
Valve Actuators
Check Valves
Safety Relief Valves
Valve Positioners& Controls
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Valves & Controls - Serves a Broad Range of Industries and Customers
$ 1+ Billion in SalesOil & GasRefiningPower Generation
$1+ Billion in SalesMining & Mineral ProcessingChemical & PharmaceuticalFood & BeverageMarine Kellogg Brown & Root
Ener
gyEn
ergy
Proc
ess
Proc
ess
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Valves & Controls - Well Positioned in a Large and Fragmented Market
Valves & Controls Market Revenue ~ $38B
Next 9
Tyco
Others
Source: McIlvaine, Management Estimates
Competitive Position
One of the broadest portfolios of valves, actuators, controls and associated services
Sales and service locations across the globe
Very well positioned to execute complex global projects
Serve multiple industries which leverages our knowledge and provides growth and diversificationTyco
2007 Revenue: ~$2.0B
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Valves & Controls - Strong Historical Growth and Positioned Well for the Future
2004 2005 2006 2007
Focus Areas
Maximize global projects opportunity
Enhance customer service via reduced lead-times
Strengthen portfolio in core product families and targeted industries
Increase working capital turns
Optimize our cost structure
Total Sales ($B)
CAGR = 13%
$1.4
$1.6
$1.8
$2.0
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Tyco Water - A Diverse Set of Products and Services
Wastewatertransmission
networks
Municipal and industrial water
treatment plants
Water distribution
Water transmission
networks
Irrigation systems
Hydro power
generation
Water pollution
monitoring
Municipal and industrial
wastewater treatment plants
Emissions monitoring
Storage systems
ValvesPipesFittings,
flanges andcouplings
Pumps Meters and instruments
Tanks Hydrants
Broad Capabilities and Proven Technology
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Tyco Water – Well Positioned with Strong Presence in Asia Pacific and EMEA
Asia PacificRegional leader across three broad segments– Transmission & distribution– Process & control– Environmental & water
managementExpansive line of products and services built around core of pipes and valves
Europe, Middle East and AfricaPortfolio more focused on hydrants, valves, fittings, and couplings
Global WaterMarket Revenue ~ $18B
Others
Top 3
TycoFlow
Control
Next 5
Tyco2007 Revenue: ~$1.2B
Pacific
EMEA
USAsia
Source: McIlvaine, Management Estimates
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2004 2005 2006 2007Water (ex Pacific Pipe) Pacific Pipe Business
Tyco Water - Strong Historical Growth Combined with Project Spikes
Total Sales ($M)
Pacific pipeline business doubled between 2005 and 2007 due to strong project activity
Pacific pipeline business expected to decline modestly
CAGR = 16%
6%CAGR
37%CAGR
$1,179
$761
$674$562
Challenging YOY Revenue Comparison into 2009
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Tyco Water - Positioning for Expansion
Focus Areas
Focus on most profitable segments of water market
Expand geographic base from core businesses in Europe and Pacific
Develop pipe and valve adjacencies including pumping and environmental systems
Simplify business through product and portfolio rationalization
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Thermal Controls—A Broad Set of Industrial Heat Management Products and Services
Heat Traced Tubing Bundles and Instrument Winterization
Temperature Control and Monitoring Systems
Steam Powered & Electrically Powered Heat Delivery Systems
Outdoor Pipe and Valve Freeze Protection
Heat Tracing Power Distribution Systems
Fire Performance Mineral Insulated and Polymeric cables
Pipe, Vessel & Tank Thermal Insulation Systems
Leak Detection Systems
Tank Heating Systems
Ramp Heating
Pipe and Tank Corrosion Prevention
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Thermal Controls—Evolution From Products to Solution Provider
1970’s
Heat tracing products
Engineering
Installation
Project management
Heat tracing systems
Turnkey solutionSingle point of responsibility
–Precise, reliable heat tracing products
1980’s 1990’s 2000’s
Improved Customer Satisfaction Through Project Management
SolutionsSupplying high quality
products
Lowering total life
cycle cost of heat
$4 of revenue for every $1 of
product sale
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Thermal Controls—Integral to Flow Control’s Future
Focus Areas
Execute current “mega” oil and gas projects
Strengthen North America services model to ensure scalability and extend project pipeline
Replicate services model in Europe and Asia
$543
$466
$370$346
2004 2005 2006 2007
Total Sales ($M)
CAGR = 16%
Expected to grow to near $1B over next few years
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Tyco Flow Control – Strong Revenue and Operating Income Growth Outlook
Revenue and Income Potential
Strong end market demand –particularly energy and water
Operating income improvement
– productivity improvements
– higher volume
– pricing
$ in 000s 2006 2007 Q208
Revenue $3,135 $3,766 $1,024
Organic Revenue Growth*
13.3% 14.4% 6.9%
Operating Income Before Special Items*
$356 $486 $143
Operating Income Growth
6% 36% 28%
Operating Margin Before Special Items*
11.4% 12.9% 14.0%
* Organic revenue growth, Operating Income before special items and Operating Margin before special items are Non-GAAP measures. For a reconciliation, please see Appendix.
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Tyco Flow Control - Backlog Continues to Be Strong
$1,906
$1,579
$1,115
$771$616
2004 2005 2006 2007 2008Q2
Continued strength in oil and gas bookings for both Valves & Controls and Thermal Controls platforms
Process industries continue to provide solid growth in both developed and emerging markets
Beginning to execute on “mega”projects for Thermal Controls with pull through in Valves & Controls
Total Backlog ($M)
CAGR = 38%
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Our Management Team is Focused On Growth and Profitability
Gain market share in strong growth markets
Positioning Thermal Controls for long-term project growth
Drive Operational Excellence and operating leverage
Strong ROIC with opportunity for improvement
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Tyco Flow Control - Summary
Global leader in the markets we serve
Balanced portfolio with diverse end markets
Strong macro trends driving growth with strength in infrastructure and emerging markets
Well positioned to execute mega projects
Significant operational improvement has been achieved – more opportunities exist
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Organic revenue growth of 3.6% led by Flow Control and Electrical & Metal ProductsOperating income and margin improvement across each of the businesses Significant reduction in corporate expenseEPS from Continuing Ops before Special Items increased 103% year over year
Revenue $4,866 $4,490 8%Organic Revenue Growth* 3.6% 5.2%Operating Income
before special items* 492 282 74%Operating Margin
before special items* 10.1% 6.3%EPS from Cont. Ops.
before special items* $0.67 $0.33 103%
Q208 ($ in millions, except EPS)
* Organic revenue growth is a non-GAAP measure. Operating income, operating margin and EPS from continuing operations before special items are non-GAAP measures. Please refer to Appendix for a reconciliation to the most comparable GAAP measures.
Q2 Results – Delivering Earnings Growth
% Change
Strong Start to 2008; FY 2008 Guidance Increased to $2.65 - $2.75
Q207
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Summary
Positioned for a Stronger Future
A diverse portfolio of market-leading businesses in electronic security, fire, safety services and products, valves and controls, and other industrial productsStrong global business in attractive, growing marketsLarge service revenue baseSignificant earnings growth opportunities
– Operational execution– Portfolio refinement– Appropriate use of capital
Strong cash flow generation and financial flexibility
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Appendix
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2007 Financial Summary
Revenue of $7.6B
Operating Income before Special Items*of $971M and Adjusted EBITDA* of $1.9B
Global provider of residential and commercial security systems
Market leadership position
7.1 million customers globally
Large stable recurring revenue base (~$4 billion)
Opportunities
Disciplined growth and operational execution focus in NA
Improving operating margin in EMEA
Faster growth in emerging markets
ADT Worldwide At A Glance
* Adjusted EBITDA and Operating Income before special items are Non-GAAP measures. For a reconciliation to the most comparable GAAP measures, please see Appendix.
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Global leader in valves, controls and related products
Well-known brands with strong positions
Geographic and end market diversity
Strong macro-economic trends driving strong growth
Opportunities
Gain market share in strong growth markets
Grow thermal controls business
Operating leverage and Operational Excellence
Flow Control At A Glance
2007 Financial Summary
Revenue of $3.8B
Operating Income before Special Items* of $486M
* Operating Income before special items is a Non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
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Global provider of electronic and mechanical fire systems
Service represents almost half of the total revenue
Strong global presence
NA is the largest market and has been steadily improving profitability
Opportunities
Increase service revenue
Operational execution –standardizing operations across the business
Fire Protection Services At A Glance
2007 Financial Summary
Revenue of $3.4B
Operating Income before Special Items* of $281M
* Operating Income before special items is a Non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
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Safety Products At A Glance
Market leading provider of:– Fire Suppression– Electronic Security– Life Safety products
Strong market position with leading technologies
Attractive markets with good growth and profit opportunities
Opportunities
Invest in Technology
Operational Excellence/ Restructuring to improve productivity
Global expansion
2007 Financial Summary
Revenue of $1.7B
Operating Income before Special Items* of $313M
* Operating Income before special items is a Non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
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Market leader in steel tubes and pipes, armored cable and electrical conduit products
Strong, well known brands
Purchases and processes over one million tons of steel per year
Profit is dependent on metal spreads – primarily steel and copper
Opportunities
Operational Excellence –improve productivity and reduce conversion costs
Consolidate facilities
Electrical & Metal Products At A Glance
2007 Financial Summary
Revenue of $2.0B
Operating Income before Special Items* of $166M
* Operating Income before special items is a Non-GAAP measure. For a reconciliation to the most comparable GAAP measure, please see Appendix.
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We Generate Strong Incremental Returns on Invested Capital
ROIC ROIC (Excluding Goodwill)
0% 20% 40% 60% 80% 100% 120%
Total Tyco
Electrical & MetalProducts
Flow Control
Safety Products
Fire ProtectionServices
ADT Worldwide
*ROIC is a non-GAAP financial measure. Please see the following tables for a description of how ROIC is calculated.
2007 Return on Invested Capital*2007 Return on Invested Capital*
40
6%
NM
3%
7%
7%
11%
10%
8%
2007ROIC
$1,100
($502)
$1
$120
$226
$351
$203
$701
2007Op Inc*
After Tax
($1,551)Corporate
$17,149Total
$32Other
$1,829Elec. & Metal
$3,085Safety Products
$3,086Flow Control
$1,965Fire Protection
$8,703ADT Worldwide
2007 Avg Invested
Capital
$M
Return on Invested Capital(Including Goodwill)
* Operating Income is before special items which is a Non-GAAP measure. For a reconciliation, please see the following tables.
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19%
NM
33%
16%
25%
28%
82%
17%
2007ROIC
$1,100
($502)
$1
$120
$226
$351
$203
$701
2007Op Inc*
After Tax
($1,367)Corporate
$5,856 Total
$3Other
$759Elec. & Metal
$913Safety Products
$1,238Flow Control
$249Fire Protection
$4,061 ADT Worldwide
2007 Avg Invested
Capital
$M
Return on Invested Capital(Excluding Goodwill)
* Operating Income is before special items which is a Non-GAAP measure. For a reconciliation, please see the following tables.
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2006 Organic Growth
5.3%17,076872(78)(114)16,396Total
0.0%13-(1)-14Corporate & Other
7.6%1,949 136 15 -1,798Electrical & Metal
3.8%1,624 61 (2)(56)1,621Safety Products
4.9%3,150148 (12)(39)3,053Fire Protection
13.3%3,135372 (43)-2,806Flow Control
2.2%7,205155 (35)(19)7,104ADT Worldwide
Organic % 2006 RevOrganic GrowthFXAcq/Disp2005 Rev$M
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2007 Organic Growth
5.3%18,490 902581 (69)17,076Total
23.1%17 31 -13Corporate & Other
0.2%1,974 420 1 1,949 Electrical & Metal
2.8%1,719 4649-1,624 Safety Products
4.6%3,366145101(30)3,150Fire Protection
14.4%3,766450197 (16)3,135Flow Control
3.5%7,648 254213 (24) 7,205ADT Worldwide
Organic % 2007 RevOrganic GrowthFX
Acq/Disp & Other2006 Rev$M
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Q207 Organic Growth
5.2%4,490 215 123(2)4,154Total
33.3%31(1) -3Corporate & Other
1.1%479 58 -466 Electrical & Metal
2.2%424 951 409Safety Products
4.8%8193717(8)773Fire Protection
12.4%8789244 -742Flow Control
4.0%1,8877150 5 1,761ADT Worldwide
Organic % Q2FY07
RevenuesOrganic GrowthFX
Acq/Disp & Other
Q2FY06 Revenues$M
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Q208 Organic Growth
3.6%4,866 160228 (12)4,490Total
33.3%41 --3Corporate & Other
5.4%4692323(1)424Safety Products
10.6%5425112-479Electrical & Metal
0.5%861438-819 Fire Protection
6.9%1,0246186(1)878Flow Control
1.1%1,966 2069(10) 1,887ADT Worldwide
Organic % Q2FY08
RevenuesOrganic GrowthFX
Acq/Disp & Other
Q2FY07 Revenues$M
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2006 Operating Income Before Special Items
Fire ElectricalADT Flow Protection & Metal Safety Corporate
Worldwide Control Services Products Products and Other Revenue
Revenue $7,205 $3,135 $3,150 $1,949 $1,624 $13 $17,076
Fire ElectricalADT Flow Protection & Metal Safety Corporate Operating
Worldwide Control Services Products Products and Other IncomeOperating Income $907 $356 $241 $319 $196 ($662) $1,357
-
Separation costs - (1)- - - 50 49
Losses on divestitures - 2 - - - 2
Reduction in estimated worker’s compensation liability (48) (48)
Voluntary Replacement Program - - - - -
Former Management Settlement - - - -
100
-
100
Operating Income Before Special Items $909 $356 $240 $319 $296 ($732) $1,388
(72) (72)
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2007 Operating Income Before Special Items
Fire ElectricalADT Flow Protection & Metal Safety Corporate
Worldwide Control Services Products Products and Other Revenue
Revenue $7,648 $3,766 $3,366 $1,974 $1,719 $17 $18,490
Fire ElectricalADT Flow Protection & Metal Safety Corporate Operating
Worldwide Control Services Products Products and Other IncomeOperating Income $842 $457 $258 $159 $274 ($3,721) ($1,731)
Restructuring charges in cost of sales and SG&A - 6 1 - - - 7
Class action settlement, net - - - - - 2,871 2,871
Separation costs - 1 - - - 117 118
Losses on divestitures - 3 1 - - - 4
Restructuring and asset impairment charges, net 83 19 21 7 29 40 199
Goodwill impairment 46 - - - - - 46
Voluntary Replacement Program - - - - 10 - 10
Operating Income Before Special Items $971 $486 $281 $166 $313 ($693) $1,524
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Q2 07 Operating Income Before Special Items
Fire ElectricalADT Flow Protection & Metal Safety Corporate
Worldwide Control Services Products Products and Other Revenue
Revenue $1,887 $878 $819 $479 $424 $3 $4,490
IncomeFire Electrical Interest from
ADT Flow Protection & Metal Safety Corporate Operating Expense, Other Income ContinuingWorldwide Control Services Products Products and Other Income net Expense, net Taxes Operations
Operating Income $195 $102 $62 $26 $66 ($247) $204 ($53) $1 $12 $164 $0.33
Restructuring charges in cost of sales and SG&A 1 1 1 0.00
Separation costs 1 31 32 19 51 0.10
Losses on divestitures 3 3 (1) 2 0.00
Restructuring and asset impairment charges, net 25 5 2 5 5 42 (30) 12 0.02
Goodwill impairment - -
Tax items - (63) (63) (0.12)
Operating Income Before Special Items $220 $112 $64 $26 $71 ($211) $282 ($53) $1 ($63) $167 $0.33
Diluted EPS from
Continuing Operations
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Q2 08 Operating Income Before Special Items
ADT Flow Fire Protection Electrical & Safety CorporateWorldwide Control Services Metal Products Products and Other Revenue
Revenue $1,966 $1,024 $861 $542 $469 $4 $4,866
IncomeFire Electrical Interest from
ADT Flow Protection & Metal Safety Corporate Operating Expense, Income Minority ContinuingWorldwide Control Services Products Products and Other Income net Taxes Interest Operations
Operating Income $222 # $143 # $77 # $72 # $54 # ($125) # $443 ($90) ($79) ($1) $273 $0.56
Restructuring charges in cost of sales and SG&A 2 1 3 6 (2) 4 0.01
Separation costs (5) (5) 23 (14) 4 0.01
Restructuring and asset impairment charges, net 11 1 1 25 (1) 37 (7) 30 0.06
Tax items - 1 1 0.00
Reserve Adjustment (9) (9) 3 (6) (0.01)
Legacy Legal Settlement 20 20 - 20 0.04
Operating Income Before Special Items $233 $143 $78 $75 $80 ($117) $492 ($67) ($98) ($1) $326 $0.67
Diluted EPS from
Continuing Operations
50
$264
$1,426
$1,896
2007 Adjusted EBITDA
$112
$726
$925
2007 D&A
10.3%
34.8%
24.8%
2007 Adjusted
EBITDA Margin
$2,574
$4,093
$7,648
2007 Revenue
$152ADT EMEA
$700ADT NA
$971ADT Worldwide
2007 Op Inc
before special items*
$M
Adjusted EBITDA Reconciliation
* Operating Income before special items is a Non-GAAP measure. For a reconciliation, please see preceding tables.
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Non-GAAP Measures“Organic revenue growth”, “free cash flow”, ”operating income before special items”, “operating margin before special items” , “earnings per share (EPS) from continuing operations before special items”, “adjusted earnings before interest, taxes, depreciation and amortization” (Adjusted EBITDA), and “return on invested capital” (ROIC) are non-GAAP measures and should not be considered replacements for GAAP results.
Organic revenue growth is a useful measure used by the company to measure the underlying results and trends in the business. The difference between reported net revenue growth (the most comparable GAAP measure) and organic revenue growth (the non-GAAP measure) consists of the impact from foreign currency, acquisitions and divestitures, and other changes that do not reflect the underlying results and trends (for example, revenue reclassifications and changes to the fiscal year). Organic revenue growth is a useful measure of the company’s performance because it excludes items that: i) are not completely under management’s control, such as the impact of foreign currency exchange; or ii) do not reflect the underlying growth of the company, such as acquisition and divestiture activity. It may be used as a component of the company’s compensation programs. The limitation of this measure is that it excludes items that have an impact on the company’s revenue. This limitation is best addressed by using organic revenue growth in combination with the GAAP numbers. See the accompanying tables to this presentation for the reconciliation presenting the components of organic revenue growth.
FCF is a useful measure of the company’s cash which is free from any significant existing obligation. The difference between cash flows from operating activities (the most comparable GAAP measure) and FCF (the non-GAAP measure) consists mainly of significant cash outflows that the company believes are useful to identify. FCF permits management and investors to gain insight into the number that management employs to measure cash that is free from any significant existing obligation. It may also be a significant component in the company’s incentive compensation plans. The difference reflects the impact from:
• the sale of accounts receivable programs, • net capital expenditures, • acquisition of customer accounts (ADT dealer program), • cash paid for purchase accounting and holdback liabilities, and • voluntary pension contributions.
The impact from the sale of accounts receivable programs and voluntary pension contributions is added or subtracted from the GAAP measure because this activity is driven by economic financing decisions rather than operating activity. Capital expenditures and the ADT dealer program are subtracted because they represent long-term commitments. Cash paid for purchase accounting and holdback liabilities is subtracted from Cash Flow from Operating Activities because these cash outflows are not available for general corporate uses.
The limitation associated with using FCF is that it subtracts cash items that are ultimately within management’s and the Board of Directors’ discretion to direct and that therefore may imply that there is less or more cash that is available for the company's programs than the most comparable GAAP measure. This limitation is best addressed by using FCF in combination with the GAAP cash flow numbers.
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Non-GAAP Measures
The company has presented operating income and margin before special items and EPS from continuing operations before special items. Special Items include charges and gains related to divestitures, acquisitions, restructurings (including transaction costs related to the separations of Tyco Electronics and Covidien into separate public companies), and other income or charges that may mask the underlying operating results and/or business trends of the company or business segment, as applicable. The company utilizes EPS and operating income and margin before special items to assess overall operating performance, segment level core operating performance and to provide insight to management in evaluating overall and segment operating plan execution and underlying market conditions. They may also be significant components in the company’s incentive compensation plans.
Operating income, operating margin, and EPS from continuing operations before special items are useful measures for investors because they permit more meaningful comparisons of the company’s underlying operating results and business trends between periods. The difference between EPS, operating income and margin before special items versus EPS, operating income and operating margin (the most comparable GAAP measures) consists of the impact of charges and gains related to divestitures, acquisitions, restructurings (including transaction costs related to the separations of Tyco Electronics and Covidien into separate public companies), and other income or charges that may mask the underlying operating results and/or business trends. The limitation of these measures is that they exclude the impact (which may be material) of items that increase or decrease the company’s reported EPS and operating income and margin. This limitation is best addressed by using EPS, operating income and margin before special items in combination with the most comparable GAAP measures in order to better understand the amounts, character and impact of any increase or decrease on reported results.
Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) is a non-GAAP financial measure which represents earnings, excluding certain items such as depreciation and amortization, interest and financing expenses net of any interest income and income taxes and special items excluded from operating income. The difference between reported operating income (the most comparable GAAP measure) and Adjusted EBITDA (the non-GAAP measure) consists of the impact of depreciation and amortization, interest and financing expenses net of any interest income and income taxes and special items excluded from operating income. Management considers Adjusted EBITDA as an important measure of our operations and financial performance as Adjusted EBITDA is reflective of our operating effectiveness and financial performance. Use of Adjusted EBITDA, in conjunction with our GAAP results, provides transparency to investors and enhances period-to-period comparability of our operations and financial performance. The limitation of this measure is that it excludes items that have an impact on the GAAP operating income results. This limitation is best addressed by using Adjusted EBITDA in combination with operating income.
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Non-GAAP Measures
Return on invested capital (ROIC) is a non-GAAP measure that management believes provides useful supplemental information for management and the investor. ROIC is a tool by which we track how much value we are creating for our shareholders. ROIC is a useful measure of the company’s performance because it quantifies the effectiveness of management’s capital investment activities. Management calculates annual ROIC, both with and without the impact of goodwill, as a percentage, by dividing after-tax operating income (before special items) by the amount of capital invested across the business segment. We believe that ROIC provides our management with a means to analyze and improve their business, measuring segment profitability in relation to net asset investments. The limitation associated with using ROIC is that is it is dependent on items that are ultimately within management’s and the Board of Directors’ discretion and therefore may imply that there is better or worse investment return over a given time period. In addition, ROIC may not be calculated the same way by every company. We compensate for this limitation by monitoring and providing to the reader a full GAAP income statement and balance sheet.
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